If you run a business and find bills and receipts piling up on your desk while invoices spill from the drawers, rest assured that there’s a solution: bookkeeping and accounting. Without these systems, your business will have trouble getting and staying organized, and you probably will find it difficult to know where you stand financially.
What is bookkeeping?
Here’s a rundown on bookkeeping and accounting and what they both offer, but also how they differ.
What is bookkeeping?
Bookkeeping is the recording of all a business’s financial transactions, such as sales, purchases, and bills. Bookkeeping is detail-driven and is a daily task for many businesses.
A hired bookkeeper or the business owner posts these transactions in a master bookkeeping document called the general ledger. The ledger shows all the business’s financial accounts, and is based on the principle of double entry: for each transaction, a debit and an equal, opposite credit is recorded. This means debits and credits should balance out.
Good bookkeeping serves as the basis for compiling a business’s periodic financial reports, including the income statement, balance sheet, and statement of cash flows.
Specific tasks of bookkeeping usually include:
- Maintaining the ledger and recording all transactions in the proper accounts.
- Reconciling bank statements, typically each month, so that bank balances match the ledger balances.
- Managing accounts payable and accounts receivable, so that vendors and others who are owed money get paid, and customers pay what is due. This includes invoices sent to customers, and past-due notices for delinquencies.
- Processing payroll, which can include reviewing employee timesheets and calculating payroll deductions.
- Participation in preparing financial statements.
What is accounting?
Accounting is the examination and review of a business’s transaction data, which is then summarized in a financial report for the business owner (or in the case of a public company, the shareholders). An accountant is responsible for preparing the income statement, balance sheet and cash flow statement, and attesting to their accuracy. Accountants also ensure that the financial reports of public companies conform to generally accepted accounting principles (GAAP) in the US and Canada, or international financial reporting standards (IFRS) used in other countries.
An accountant’s role is more analytical—to see the bigger picture of the business’s financial condition and its direction. It is done less often, perhaps once a month or quarter, and annually for tax preparation.
Accounting tasks include:
- An accountant determines the business’s tax liability after a review of its financial statements and general ledger, and prepares its tax return.
- Advising the business owner about finances, regulatory compliance, and tax compliance. For example, an accountant for an ecommerce business could help with issues such as proper collection of various state sales taxes, and the effect of customer returns on its financial statements.
- Assisting efforts to obtain loans, or other external financing. The accountant could vouch for the business’s financial condition, helping make the case for more favorable credit terms.
- Help in planning and budgeting, using economic forecasts and financial models. For example, a forecast of a general economic slowdown, rising interest rates, or a change in tax rules might lead the accountant to recommend a delay in expansion plans.
4 similarities between bookkeeping and accounting
People sometimes think bookkeeping and accounting are one and the same. They are not, but they have some similarities.
1. Financial data
Both bookkeeping and accounting involve financial data, albeit at different stages of the process. Bookkeepers focus more on the early stages, logging and categorizing transactions as they occur, and tracking account balances. Accountants tend to work on the back end, summarizing and drawing conclusions from the data gathered and recorded during bookkeeping.
2. Skills
Bookkeepers and accountants also require some of the same skills. Both are comfortable with numbers and focus on details and accuracy. They strive for consistent and systematic organization of business records, which makes preparation of financial reports smooth and efficient.
3. Overlap
The roles of bookkeepers and accountants complement each other, and often overlap. Accountants can perform bookkeeping tasks, and bookkeepers can assist in preparing financial reports.
4. Double-entry system
Both bookkeepers and accountants use the double-entry system, a cornerstone of modern capitalism, in which each transaction is recorded in terms of a debit and an equal credit on the left and right sides of the ledger, respectively. The sum of debits should equal the sum of credits. Double entry standardizes the bookkeeping and accounting processes and improves the accuracy of financial statements.
6 differences between bookkeeping and accounting
Even with their similarities, bookkeeping and accounting are distinct and separate activities.
1. Quantitative vs. qualitative
Bookkeeping is gathering and presenting financial data; accounting is evaluating that data. Bookkeeping is an objective and quantitative task, focusing on each transaction, often as it occurs. Accounting is more subjective and qualitative, focused on the summary and analysis of all transactions in financial statements.
2. Frequency
Bookkeeping is a day-to-day activity; accounting is periodic. A bookkeeper records each transaction, often updating a business’s general ledger daily. An accountant generally interacts with the business intermittently—such as each month or quarter.
3. Qualifications
Bookkeeping requires no specific professional qualifications; accounting does. A bookkeeper should show a general aptitude for detail and accuracy with numbers, and some familiarity with financial and accounting terms, but needs no formal training or certification. To be an accountant, a person must have a minimum of a bachelor’s degree in accounting, business, or finance. Accountants often seek additional qualifications by passing a rigorous examination to become a certified public accountant (CPA). They sometimes also seek further certification to provide additional services.
4. Audits
Unlike bookkeepers, accountants are qualified to audit and certify financial statements as accurate. An accountant typically oversees and reviews a bookkeeper's work while evaluating all aspects of a business’s finances. More broadly, an accountant may do bookkeeping, but a bookkeeper doesn’t do accounting.
5. Taxes
Accountants can file tax returns and develop tax planning strategies for a business. Bookkeepers can’t file tax returns, unless they earn an IRS certification as an enrolled agent, nor can they perform tax planning.
6. Cost
A small business also should understand that an accountant costs more than a bookkeeper. Hiring an accountant for services such as tax filing is smart and necessary. Paying an accountant for bookkeeping tasks is a waste when a bookkeeper can do the same work and costs less.
When should you hire a bookkeeper or an accountant?
A business might consider hiring a bookkeeper if it’s growing and the owner needs to spend more time and effort developing the business and increasing sales rather than record keeping. A designated employee, or someone hired from the outside, can keep the books.
An accountant, on the other hand, is needed when a business becomes more complex as it grows, especially if it goes public and has outside shareholders. Accountants can also help companies navigate regulations and compliance requirements, such as varying state sales-tax collection rules for online businesses.
Bookkeeping vs. accounting FAQ
What qualifications do bookkeepers need?
Bookkeepers don’t need particular qualifications or training, although many bookkeepers enroll in classes to study the basics, such as double-entry bookkeeping protocols. Some experienced bookkeepers who pass an examination and take some continuing education courses can receive professional accreditation from organizations such as the National Association of Certified Public Bookkeepers.
What qualifications do accountants need?
A bachelor’s degree in accounting or a related field is the minimum qualification to work as an accountant. Further qualifications include passing a state-level test to become a CPA, or certified public accountant. Other qualifications include CIA (certified internal auditor) and CFA (chartered financial analyst).
How do bookkeeping and accounting impact tax reporting?
Keeping an accurate ledger of all business transactions is a key bookkeeping task, and includes any supporting documents required by the IRS, such as receipts and invoices, canceled checks, and account statements. Examining the ledger and supporting documents to prepare taxes and financial statements is an accounting task.
